Sunday, November 21, 2010

SKS Micro-finance has become a Proxy, Hammer it, Hammer the Whole Industry,

From a high of Rs 1,490 soon this is
when the after listing, the SKS script closed last Friday at Rs 673,
significantly below its listing price of Rs 985, after making a new all time
low of Rs 601.

There was full drama too at the counter, the day after the share hit the
20% downward circuit breaker (see chart), reacting to SKS comments that its
collections have come in lower than normal, post the Andhra Pradesh government
ordinance. Presumably, to allay investor's fear after the crash, the
CEO-Chairperson of SKS, Vikram Akula and his CFO, Dilli Raj, on opening bell
gave an one-hour studio interview with CNBC-TV 18, the country's premier
financial news channel. During the course of the interview, the SKS share
soared to trigger the upper 10% circuit breaker, giving rise to speculation
that this was a turnabout in the script's downturn momentum.

Yet, this elation proved a momentary bubble. Despite mind boggling
market breadth (7 million share turnover), SKS only managed to close 5% higher
than its previous day's close, suggesting that the rebound was only in the
nature of a relief rally. Technically, the script still remain very weak,
having made new lows in each of the past eight consequent trading sessions.
This week we can expect bear hammering to resume though the stock may open with
some gains on Monday. Unlike the beginning of last week, where short positions
significantly outnumbered longs, at close of the week, it was the exact
opposite. Being a highly volatile script, SKS price movements are extremely
vulnerable to news flows. There exists little possibility for sufficient flow
of good news to sustainably power any strong upward movement of the script. On
the contrary, there are increased possibility of bad news flows that could
trigger sharp, speedy, downward movement of the script through panic selling
especially when longs outnumber shorts in trading positions.

Though Rs 601 is likely a good support
level, it is unlikely to be firm enough to act as a bulwark against any
gravitational pull down effects from really bad news flows like the possibility
of a Regulatory Bill that strangulates micro-finance growth. Even the
bulls understand this and accordingly it becomes very unlikely that there would
be any frenzy bull charge to be seen during this week's trading.

We suspect Rs 300 or near about, (the price Narayana Murthy of Infosys bought
into the script), as its true intrinsic price level. But with the
dark underbelly of micro-finance daily being constantly exposed, the bottom of
the share could even plunge below Rs 300 levels. Vikram Akula on the run up to
the IPO said investing in SKS will give alot of money for its investors. It is
ironic that it is the bears who are now making all the money out of SKS script
these days and the investors ended being burnt by it!

JP Morganand Kotak Mahendra though drastically cutting down
the profit outlook by 30% for SKS in the next three years, however upgraded the
share to a buy at Rs 700 levels. The irony was just as JP Morgan's and Kotak
Mahendra's advisories were flashed, the SKS script breached Rs 700 and went
straight to Rs 601, in a matter of minutes and then rebounded sharply to
suggest Rs 601 as a fairly strong support level for the script instead of Rs
700 as they suggested. Both JP Morgan and Kotak Mahendra provided a whole
series of risk caveats accompanying their buy advisories while capping the
stock's upside from buy levels to 25-30%. In simple words, both advise buys
while cautioning the script falls within the highly risky category viz. advise
buy only for those with very high risk appetite!

Our blog was in fact the first to
categorically give advance warning, as early as two weeks ago, that SKS script
was entering a free fall (Read here) and many of these equity analyst and
brokerage firms including JP Morgan had been repeat visitors to our site.

Being highly volatile as demonstrated
by Friday's wild swing of Rs 102 together with as much as 70 million in market
depth that is rapidly growing, makes the SKS counter a trader's delight. It is
probably on its way to be the number one counter for equity traders in the
country. This can't be good news for the micro-finance industry, as this puts
both SKS and Vikram Akula under constant media glare, becoming the proxy for
continued debate on the social relevance of the industry. We understand many in
the micro-finance industry are actually appalled and squirming at this turn
of events.

THE VIKRAM AKULA-DILLI RAJ HARD SELL - BOOMERANGS

It was however interesting to note that
Vikram Akula repeatedly chose to describe SKS as a business. Though he wore his
trademark designer Khadi kurta, all pretense was off to live up to his Messiah
of the Poor image carefully crafted by his PR Department. This image fell apart
quickly as the world realized that this sleazy operator only used images of
helping the poor to catapult himself as one of the wealthiest in the world.
Maybe in the course of time, who knows he would discard his ethnic wear too to
exchange for a Pierre Cardin suit and tie too? These days Vikram Akula walks,
surrounded by a protective cordon of security men armed with AK47s, being
afraid of a violent backlash from the public, especially Naxalites. That a
person once touted as the Messiah of the Poor now needs protection from the
poor is an image the industry would like to wish away in their present
battle to win public support. But there he is as mascot for all those who want
to ban MFIs or rein them in by strangulating regulation. Vikram Akula embodies
everything we find repulsive of MFIs and we cannot ask for more as our mascot!

Back to the exclusive interview with CNBC-TV18, Chairman Vikram Akula and his
CFO Dilli Raj tried to allay investor fears of prospective insolvency of
the company by arguing SKS was well capitalized. Akula said that though the
Andhra Pradesh ordinance has some impact on the MFIs, SKS could easily weather
the storm on the back of a strong balance sheet, capital adequacy ratio (CAR)
and besides its non-AP portfolio has 99% repayment rates.

Dilli Raj intervened to reiterate that "There are absolutely no issues in 18 states
where we work." Akula further informed that SKS exposure to AP stands at
Rs 1400 crore which is 26% of the total loans." "ICICI Bank,
Axis, SBI, PNB have supported us. We do not need any liquidity support from
anyone and our loan book is expected to grow to Rs 7500 crore while RoA
maintained at 5%", Akula boasted.

Dilli Raj added "To start with our exposure to Andhra
Pradesh it is a mere 20% of total portfolio mix. In hard number that is Rs
1,400 crore compared to an assets under management (AUM) of more than Rs 5,600
crore. In terms of your question on what is overdue, the ordinance came into
effect from October 15, with a monthly periodicity so collection it started
November 15 onwards. It is just three days, which is too early to talk about
what is overdue.

Going back to one point on the capital adequacy, the way to look at it is our
exposure to Andhra Pradesh is a fraction of our net-worth of Rs 1,800 crore are
not a multiple. There has been liquidity in the price for some time now. We
manage our liquidity through well defined liquidity metrics, which calls for
holding sufficient cash and cash equivalent to meet all corporate obligations
including bank repayment, OPEX and most importantly disbursement to existing customers
for the next six months."

The duo said that though SKS is hardly affected by their recent backlash
against MFIs, the smaller players may not be that lucky and this may bring
about industry "consolidation", a euphemism for mergers, acquisitions
and bankruptcies.

Vikram Akula continues "Given
our scale and our efficiencies in terms of economies of scale, even at 24%
there is a margin one continues to have that will allow for continued
profitability. Maybe not the same profitability we once had but certainly a
healthy profitability going forward. The specific numbers we are not in a
position to comment on as of yet because we need to wait and see how monthly
versus weekly evolves."

While the immediate impact of the
interview led to increased market confidence as reflected in the SKS share
rebounding to trigger the 10% upward circuit breaker, as the market slowly
started to digest the import of SKS statements, more and more it looks as a
total public relations disaster exercise:

1. The share price of SKS tanked when the company issued a statement
that the Andhra developments will have material impact on their bottom-line.
(Read here). In less than 24 hours, Chairman Vikram
Akula and his CFO Dilli Raj went on air to virtually retract this statement.
Firstly, this detraction came at the cost of SKS credibility, already severely
battered. Secondly, it signals a blow to the Narayana Murthy policy line of
maintaining complete transparency. This act signals the return of spin as SKS
policy. The board room battles with SKS could now turn more interesting. Watch
this space.

2. The claim that SKS is a business and well capitalized opened a can of
worms. Firstly, it fanned the fires of the on-going debate, even within the
government, whether such firms deserve priority lending subsidies. The
chorus against the government to end such policies is now expected to grow
even louder and shriller. In this sense Akula-Raj put their foot into their
mouth.

Secondly, it may accentuate the split within MFIs even deeper.
Vijay Mahajan, the visible face of MFIN, a micro-finance association, earlier
told the media that the micro-finance sector is collapsing from cash flow
problems.So real was this prospect that the industry fanned the rumour of
the banking industry collapse due to their exposure to the micro-finance
industry, even when it wasn't a fact. SKS on the other hand, broke ranks with
the industry to claim that bank lending to them remain unaffected and that they
are in the pink of financial health. This has not gone down well within the
industry, creating much disaffection among MFI community, particularly
smaller ones who are suffering from severe cash flow problems on account of
banks going slow on releasing even committed credit pipelines. This gaffe
by Akula-Raj duo is bound to raise the question whether SKS is the sole
beneficiary of government partiality. The government, already pushed to the
backfoot with allegations of Rahul Gandhi's links to SKS on the basis of one
innocent visit to SKS a few years ago, are now expected to take a harder line.

3. Notice the differing estimates of SKS AP exposure at differing points
of time by the company's official spokesmen. When the crisis first broke
out this figure was put as 38%, then it dropped to 28% and now Vikram
Akula says it is only 26% while his CFO puts it at a mere 20% in the very
same interview, where the duo appears together. Perhaps, based on the Andhra
developments, the SKS long term strategy is to drastically reduce their AP
exposure. But the fact is, as of today it is fairly high. SKS is the leading MF
lender in the state with some within the industry even saying that the state
accounts over 50% of their lending.

Andhra being the MFIs largest market in the country is not an accident
as their growth was fueled by piggy backing on NGOs and SHGs who have a
very strong presence in the state. Outside its major markets - South
India, Orissa and West Bengal - it is not easy for MFIs, including SKS, to
compensate losses from Andhra from increased profits from rest of the
country for the simple reason that neither NGOs and SHGs have much of a
presence nor SKS have the infra-structure to scale-up overnight.

This perhaps explains why the Akula-Raj duo chose to be evasive on
repeated questions on how hard their earnings will be hit due to the Andhra
developments. It must be noted that SKS attracted a high PE (Price/Earning)s
because there was lot of expectations built in probably based on their
2009-2010 numbers, that their 20010-2011 performance would be even a lot
better. The probability of these expectations materialising remain extremely
low, though the SKS third quarter results would be a clearer indicator.

4. The claim of outside AP, SKS repayment is around 99% should
also be taken with a pinch of salt. Sources within MFIs suggest that in West
Bengal and Orissa, the other two major markets for micro-finance, repayment
rates are down to 80-95%. The morale of micro-finance have taken a huge beating
all over the country and this is bound to reflect itself in repayment payments
in the weeks and months again, that in turn reflect itself on both the top-line
and bottom-line of the company.

5. Smaller MFI players should take huge offense about Akula's
comments that they may not be that lucky and this may bring about industry
"consolidation", an euphemism for mergers, acquisitions and
bankruptcies. One small MFI promoter rang me up yesterday to say "SKS is the government's blue-eyed boy.
After the IPO, SKS is cash rich, and now out to either bankrupt us or swallow
us in his own terms." Surely the split within the
MF industry will increasingly become visible and pronounced. It will the small
MFs vs the big guns. Who would the public support then? The odds are with the
smaller MFs.

Update

1. MFIs responsible for 16 suicides, SKS among them, final number to increased
as investigations get complete: AP govt: Read more

4. Udaia Kumar, managing director of rival Share Microfin says: Even if
a single MFI defaults, it might have a trickle-down effect on the entire sector
Read more

6. Crisil claims collections have
dropped by below 20% as against almost 99% prior to the government ordinance.
The report said that the creditworthiness of the MFIs also depended on their
exposure to Andhra Pradesh. Read more.